Hi all,
Going through the Scweser Q Bank and the following question has me stumped:
“Optimal Insurance is offering a deferred annuity that promises to pay 10% per annum with equal annual payments beginning at the end of 10 years and continuing for a total of 10 annual payments. For an initial investment of $100,000, what will be the amount of the annual payments?”
A) $25,937. B) $42,212. C) $38,375 The answer is C with the following explanation: “At the end of the 10-year deferral period, the value will be: $100,000 × (1 + 0.10)10 = $259,374.25. Using a financial calculator: N = 10, I = 10, PV = $100,000, PMT = 0, Compute FV = $259,374.25. Using a financial calculator and solving for a 10-year annuity due because the payments are made at the beginning of each period (you need to put your calculator in the “begin” mode), with a present value of $259,374.25, a number of payments equal to 10, an interest rate equal to ten percent, and a future value of $0.00, the resultant payment amount is $38,374.51. Alternately, the same payment amount can be determined by taking the future value after nine years of deferral ($235,794.77), and then solving for the amount of an ordinary (payments at the end of each period) annuity payment over 10 years.” I simply went 1.1^10 x 100,000, entered that as PV, 0 as FV, N = 10, I/Y = 10 CPT --> PMT. Gives me -42,212. Every time. Any help on where I’m going wrong would be appreciated!!